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Challenges Facing the People’s Republic of China

Edited by Juhzon Zhuang, Paul Vandenberg and Yiping Huang

The growth model of the People’s Republic of China has been based on high investments, exports, low-cost advantage, and government interventions. This model has successfully transformed the country from a low-income to an upper middle-income economy. However, the model has generated contradictions that could undermine future growth. Making the transition to high income requires greater reliance on efficiency and productivity improvement, innovation, and market competition. This book examines the challenges faced by the People’s Republic of China in sustaining robust growth, and policy options for making a successful transition to a high-income economy to avoid getting caught in the middle-income trap.

Monograph Chapter

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Recurrent macroeconomic crises and sharp decelerations in productivity growth in Latin America over several decades have slowed broad economic growth and contributed to concerns that many countries in the region may be caught in a middle-income trap. Understanding the causes of these crises and the role of exchange rate regimes and financial and capital account liberalization provides valuable insight into how to avoid a crisis, not only for countries in Latin America, but also for those in Asia, including the People’s Republic of China (PRC). In addition to these challenges, Latin America is grappling with high income inequality. In the past, discontent over inequality resulted in violent conflict and social instability and led to the adoption of populist policies, which contributed to macroeconomic crises. Indeed, the region remains the world’s most unequal, although income inequality has declined in the majority of Latin American countries since 2000. In contrast, income inequality in the PRC has risen dramatically since the country first began implementing market reforms in 1978, and concerns have been rising since then that inequality may become an Achilles heel and trigger social unrest or the adoption of unsustainable policies. Understanding how public policy on education and government transfers contributed to the decline in inequality in Latin America could therefore prove useful for the PRC and other emerging economies.

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